UK: Group Life Assurance - Are Registered Schemes The Only Option?

Last Updated: 10 September 2008
Article by Peter Maher

Matt Haswell looks at tax efficient group life assurance schemes outside the pension regime.

It is common for an employer to sponsor a group life assurance scheme to provide a lump sum to an employee's dependants in the event of his or her death.

In the past, in order to gain tax efficient status, the tax authorities had to approve group life assurance schemes. Prior to pensions simplification in April 2006 (A-Day), tax-privileged lump sum benefits payable on death were limited. For most employees, this was up to four times the 'earnings cap' for approved group life schemes. For high earners, in order to secure the desired level of cover, unapproved 'top up' policies which did not enjoy the same tax efficient status were often established.

Post A-Day

On A-Day the old approval regime was replaced by an HM Revenue & Customs 'registration' process. This resulted in radical changes to the shape of group life benefit structures. Features include the following.

  • Existing approved policies automatically became registered policies.

  • There is no 'earnings cap'. A scheme may set its own cap or rely on transitional provisions that allow an earnings cap to continue in the pre A-Day format until April 2011.

  • Unlimited dependants' pension can be payable on death in service. This is taxed as income.

  • A lifetime allowance (LTA) was introduced on the value of all tax-privileged pension savings, including lump sum benefits payable on death. This is currently Ł1.65m and increases year on year.

Under the old and new regimes some things remain the same in terms of favourable tax treatment.

  • Premiums paid by the employer can be offset against corporation tax as a business expense.

  • Premiums paid by the company are not treated as a 'benefit in kind' for employees.

  • Lump sum death benefits paid out are free from income tax and, if paid via a discretionary trust, are normally free from inheritance tax.

A Significant Downside To Registered Schemes

While the removal of the earnings cap brings unlimited lump sum death-in-service benefits, such benefits are only tax free if below the LTA. A tax rate of 55% applies to lump sum benefits over the LTA.

This affects high earners whose life assurance cover (traditionally based on a multiple of salary) brings them over the LTA. It also impacts on employees whose death benefits from other pension arrangements, when added to death benefits from life assurance, would bring them over the LTA.

A Solution – Excepted Group Life Policies

Group life assurance schemes do not in fact have to be established as registered pension schemes to benefit from the favourable tax treatment outlined above.

Another type of group life assurance arrangement, known as an excepted group life policy, is available. This policy does not sit within the new tax regime and any death benefits from such a policy do not form part of the LTA.

An excepted policy, which meets the following caveats, enjoys the same tax privileges as a registered scheme and should be seriously considered as an alternative.

  1. The cover must be provided to more than one employee.

  2. The same method must be used to calculate the capital sum payable in respect of all individuals included in the policy.

  3. The policy must only pay a capital sum on the employee's death, no other benefits may be payable and the cover must end before the employee's 75th birthday.

  4. The policy must have no cash-in value other than a refund of 'unused' premiums.

  5. The benefits can only be paid to an individual, charity or trustee.

  6. No employee (who is a member of the scheme) can receive death benefits in relation to another employee's death unless he or she is a financial dependant of the deceased.

  7. The policy must not be taken out with tax avoidance as the main purpose.

With guidance, these caveats can normally be easily satisfied, leading to the establishment of a tax efficient group life assurance scheme outside the pension regime and therefore providing uncapped benefits outside the LTA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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